We have seen many years of financial destruction to millions of homeowners with wave after wave of foreclosures immediately followed by wave after wave of short sales – which was sadly a dramatic improvement. Now, we are hearing and seeing evidence that the housing market is recovering. Over the past couple of years, single-family home sales activity had skyrocketed and prices have risen dramatically. Millions of formerly underwater homeowners are back in the black with home equity once again. And for those underwater… it is now a fraction of the (paper) loss they once faced. Maybe everything is going to be ok.

Admittedly, it is a relief for many who are no longer underwater. But while this is being touted as a healing real estate market, I don’t think it’s that simple. Yes, it is an improvement – but it also includes some rather murky and perhaps dangerous elements. There has been evidence of strong home sales activity, but it’s not because the normal healthy home buying public has returned to buying homes once again. What we have had was institutional investors that were looking to get in early and profit from the bottom end of the market. Further, the institutions stopped buying about a year ago and home sales have been sluggish to anemic ever since. This is why as far as I’m concerned – real estate is not recovering.

There were a number of these big institutional investors, the largest probably being Blackstone, buying both foreclosure properties being sold on the courthouse steps along with typical sales in the MLS from home sellers. They were dominating the market by overbidding. They recognized that it was a bottom, and that the pent up demand would continue once they stopped buying, which would drive prices up. So they would pay more than market value, whereas normally on the courthouse step auction you had small local investors who would fix up a property and then re-sell it to a home buyer. The goal of these small local investors is to buy below market value and allow an opportunity to profit from a “fix & flip” over a short timeframe. In contrast, these well-funded institutions were buying single-family homes to fix and rent for an extended time, while the market recovered.

During this time of aggressive institutional buying, the individual homebuyers would write offer after offer trying to get a house. These homebuyers were simply unable to compete and buy properties because the homes would not appraise for as much as investors were willing to pay. That means buyers could not get a loan for the amount that the institutional investor was able to pay even if they were willing to pay over market value. The institutional investor was willing to overbid because they knew it was at market bottom and that prices would rise beyond that. In fact, what happened for a period of time, was essentially a bidding war between deep pocketed institutions and regular buyers. Once the institutions were done, the regular people would still be there looking to buy, which would drive prices up further. However, at this point prices rose so dramatically that it created a new small housing bubble.

Traditionally, after a market downturn, smaller local investors would buy and rehab a foreclosure then sell it to a homebuyer looking to live in the home. These improved properties go to someone who would own and occupy the home. This helps stabilize the market and is a sign of a true recovery. It has been a common part of any local real estate market. However, with the big institutions willing to pay market value and above, the smaller local investors had been pushed out, unable to compete. This essentially pulled these properties off the market for an extended period. As it turns out in Sacramento, many thousands of single-family homes were sold and converted into rental properties (income properties) to be held and presumably resold at some point in the future.

Institutions are going to do what’s profitable for an institution, not what’s healthy for a community. The problem with what has happened is that these high volume homeowners are a new force affecting the future of housing values. They control a sizable chunk of the market and are going to behave with a pure profit motive, as is their responsibility. But this is something that never existed on this scale in the single-family housing market before.

Compounding the volatility in the marketplace is Washington policy and Federal Reserve activity that treats housing as an accelerator – a gas pedal, if you will – for the US economy. By making cheap money available, it drives up prices as people rush to get unrealistically, or uncharacteristically, low interest rates. Basically, the policy is to use housing as a way to stabilize the economy. While that may have some positive effect on the economy, it manipulates the market when the market is left to return to its normal equilibrium. If prices are driven unrealistically high because of very aggressive interest rates – the very real risk is those prices come back down and again and homeowners lose value.

When you take into consideration all of the self serving forces working in the market, it becomes clear that just because there is activity – doesn’t mean it is healthy or recovering. By educating yourself of the risks and complexities of the real estate market, you are better able to make an informed decision if you are thinking of buying a home.

23 Comments to “Real Estate Is Not Recovering…”

I am one of those patiently waiting how things will go with the Trump presidency, he’s obviously business minded but we’ll have to see how this administration does to the real estate economy moving forward.theinvestor recently posted…A look back at global real estate in 2016

I am a Maryland Real Estate Agent, and in our area we are just under what home values were at the peak in 2008. Many home owners who were underwater after the crash are back in the green now if they waited it out. There is allot of talk of a potential shift in our near future though.Malcolm recently posted…9 Critical Tips for Buying New Construction Homes in Maryland

The market has recovered a lot from the crash around 2008. We have been watching the prices go back up, but interest rates are still down. Are we seeing bubble signs in the market again? Will the market level out or back down? If it goes down or levels out from the steep incline we have been seeing how will that affect things? Do we think interest rates will stay down or start to climb back up? If they start to go back up when do you think this will be?Laura Willis recently posted…10 Steps: How to Make a Successful Relocation Move

Hi Laura, thanks for chiming in. My point about not recovering is that rising prices, while solving a problem for many, are really simply a part of our manipulated housing market. Low interest rates and institutional interest in single family housing has caused prices to rise, but is it a healthy housing market? Is it a safe place for a families ‘nest egg’? I believe that housing will continue to boom and bust to the benefit of some and the detriment of others.

The real estate market is recovering. the problem is, they didn’t really put in place new regulations. The banks who caused this in the first place is up to their usual antics again. The collapse will happen again. I guarantee it.michael chudi ejekam recently posted…The Global Impact Of Air Conditioning: Big And Getting Bigger

What a great post and I am totally agree with your point that real estate is not recovering but According to me the best business is this Real estate only. One can mint so much money from it. By the way it is very nice post and thank you so much for sharing.

I loved this article Bill! So much good information in this post, it’s share worthy for sure. The Summerlin real estate market is doing pretty well though! There are plenty of low priced homes for sale in Summerlin, Nv.

Here’s a thought: until you SELL your house, you don’t lose. The market goes up and it goes down. If you are afraid of your loan being worth more than your house, don’t buy a house. Most mortgages are for 30 years, and in 30 years the market may have a couple/few turns. What I am getting at is basically the price will come back, and you will not lose.

What a great post and I am totally agree with your point that real estate is not recovering but According to me the best business is this Real estate only. One can mint so much money from it. By the way it is very nice post and thank you so much for sharing.

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I think that since there is traction and movement, this is a good sign that people are getting less afraid to make a move. However, in my town there is not enough inventory. Those looking to purchase homes in a certain price ranging are battling. This is good for the seller because they are getting more than asking price. The homes that are higher priced are sitting ducks! This piggy backs your point that movement doesn’t necessarily mean good. It just means, well, movement.

Thanks for the great post!Wilmingtonforrent recently posted…Hello world!

This is exactly the same thing we saw happen in Phoenix Arizona. We would try to buy houses at the foreclosure auctions and the institutional buyers were paying nearly the same price as what the full retail price was at that time.

There is published evidence that the real estate market IS coming back. Sales of all kinds of real estate are increasing, please provide sources for where you are getting this information.Realtor In The Woodlands recently posted…The Best Attractions and Activities in The Woodlands, TX